Are the Barbarians at the Gate Again? Harking Back to the 80s, the SEC Charges 14 in Wall Street Insider Trading Ring

Today, the SEC filed insider trading charges against fourteen defendants who are reported to have made at least $15 million in illicit profits in connection with two related insider trading schemes in which Wall Street professionals serially traded on inside information tipped to them by insiders at UBS Securities LLC and Morgan Stanley & Co., Inc. in exchange for cash kickbacks.  The complaint alleges that since 2001 several participants, including among others three hedge funds and two broker-dealers, traded using inside information misappropriated by a UBS executive to trade ahead of UBS analyst recommendations.  Additionally, the complaint alleges that several securities industry professionals and a hedge fund traded using inside information misappropriated by an attorney at Morgan Stanley to trade ahead of corporate acquisition announcements.  

Specifically, the complaint alleges that, from at least 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, secretly   furnished inside information in violation of the securities laws concerning upcoming UBS analyst upgrades and downgrades to at least two Wall Street traders, Erik R. Franklin and David M. Tavdy, in exchange for sharing in the illicit profits from their trading on that information.  Franklin then illegally traded on the information in his personal accounts, his father-in-law’s personal accounts, and for two hedge funds he managed.  According to the complaint, Tavdy illegally traded on the inside information in his personal account, the accounts of a relative and friend, the accounts of Jasper Capital LLC, a day-trading firm with which Tavdy was associated, and for Andover Brokerage, LLC and Assent LLC, registered broker-dealers where Tavdy was a proprietary trader.      The SEC further alleges that Franklin and Tavdy tipped others including Mark E. Lenowitz, who illegally traded on this inside information personally and for DSJ International Resources Ltd. (dba Chelsey Capital), a private hedge fund, and three registered representatives at Bear Stearns. Additionally, the complaint alleges, David A. Glass, the owner of Jasper Capital, also traded on Tavdy’s UBS tips.    

The complaint also alleges that several of the participants in the UBS scheme, and others, traded ahead of corporate acquisition announcements. According to the complaint, Randi Collotta, an attorney for Morgan Stanley, together with her husband, Christopher Collotta, an attorney in private practice, tipped inside information to Marc Jurman, a registered representative in Florida, in exchange for sharing in Jurman’s illicit profits from trading on this information. The complaint alleges that Jurman had several downstream tippees who also traded, including Franklin and the Q Capital hedge fund, and two registered representatives at Bear Stearns, Babcock and Okada, who also were involved in the UBS Scheme.  Today, the U.S. Attorney’s Office for the Southern District of New York also announced criminal charges against Guttenberg, Franklin, Tavdy, Lenowitz, Babcock, Okada, Glass, Randi Collotta, Christopher Collotta, Jurman, and others in connection with these two insider trading schemes.   

 Several high ranking SEC officials commented on the day’s events:  “Our action today is one of several that will make very clear the SEC is targeting hedge fund insider trading as a top priority,” said SEC Chairman Christopher Cox.    “Today’s events should send a message to anyone who believes that illegal insider trading is a quick and easy way to get rich. No matter how clever you are, no matter how hard you try to avoid detection, you underestimate us at your peril,” said SEC Enforcement Director Linda Chatman Thomsen. “Illegal insider trading undermines the level playing field that is the hallmark of our capital markets. It is, however, particularly pernicious when Wall Street insiders – who derive their already substantial livelihood from the capital markets and those markets’ investors – shamelessly compromise the markets’ integrity and investors’ trust for a quick buck.”   

SEC Associate Director of Enforcement Scott W. Friestad said, “Today’s action is one of the largest SEC insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine. It involves fraud by employees of some of the biggest brokerage and investment banking firms in the country. We will do everything possible to make sure that, in addition to any other remedies or sanctions imposed, none of these individuals ever works in the securities industry again.”    As Associate Director Friestad apply points out, today’s cases are reminiscent of the large SEC insider trading cases of the 1980s involving Ivan Boesky, Michael Milken and other large Wall Street players, tales of which are chronicled in the best selling book, Barbarians at the Gate.  The cases in the 1980s were noteworthy for the often larger than life characters at the center of the scandals and the results.   Many of the key figures in those scandals, such as Messrs. Boesky and Milken, settled with the U.S. Attorney and the SEC rather than taking their cases to trial.  Those who settled typically landed in jail and barred from the securities business.  In contrast, may of those caught up in the scandals of the 1980s who contested the government’s claims were acquitted.     

The cases brought by the SEC and the DOJ today are clearly reminiscent of the trading scandals of the 1980’s.  Like the initial cases of that time period, the cases today may be only the first of more to come.  The SEC is also conducting a sweep of Wall Street brokers to determine if information was leaked to hedge fund customers about institutional trade orders in advance of the execution of those orders so that the hedge funds could trade ahead of the institutions – that is, insider trade – at another brokerage firm, as previously reported in this blog.  At the same time a noteworthy feature of the cases brought today is that, unlike most SEC enforcement actions, these cases were not settled at the time they were filed.  Rather, the defendants are contesting the charges.  As these cases proceed we will see if they truly are like those of the 1980s with the SEC and DOJ winning in settlement but not in court.      Next week we will continue our series on SEC enforcement trends.